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China Revamps Renewable Energy Law

28 January 2010

Mayer Brown JSM Legal Update

The National People's Congress ("NPC") Standing Committee adopted amendments to the Renewable Energy Law ("REL Amendments") on 26 December 2009, although they will not become effective until 1 April 2010. The Renewable Energy Law ("REL"), which came into effect in January 2006, has provided legislative guidelines for the emerging renewable energy sector in the People's Republic of China ("PRC"). Since the implementation of the REL, there have been significant developments in the renewable energy sector, particularly with respect to wind and solar power. A number of inefficiencies in the REL arose with the rapid expansion of the renewable energy industry in the PRC.

The REL Amendments appear to be mainly driven by a stark realisation by the PRC authorities that the legislative framework did not match the unprecedented progress of the renewable energy sector, specifically the wind power sector. It has been widely reported that despite the tremendous growth of the wind power sector, for example that the PRC is expected to surpass Spain and become the world's third largest wind power producer in early 2010, the power grids servicing wind power generators have not been able to dispatch all of the potential energy generated. The REL was amended to address the following systemic problems:

Inadequate coordination between the central government and local governments in renewable energy planning

Lagging development of power grids in support of newly-constructed renewable energy sites

Lack of assured interconnection of renewable energy projects to the grid

Strengthening the Cooperation between Central and Local Governments

The REL Amendments explicitly require the local government departments responsible for energy administration to devise renewable energy development plans based upon the national renewable energy development strategy. Such local government departments are to notify the National Energy Administration ("NEA") and the State Electricity Regulatory Commission ("SERC") of their renewable energy plans after they have obtained approval from the local government.

Guaranteed Grid Connection

Under the REL, when power grid companies enter into interconnection agreements with renewable energy projects, the grid company is required to purchase and dispatch the entire amount of electricity generated from the renewable energy project. Further, many of the renewable energy sites were built in remote regions without a developed power grid. As a result, grid companies have been reluctant to provide interconnection to renewable energy sources.

The REL Amendments implement a guaranteed system for the complete purchase of electricity generated from renewable energy sources. A policy document entitled Medium and Long-Term Development Plan for Renewable Energy in China released by the National Development and Reform Commission ("NDRC") in September 2007 (NDRC Energy [2007] No. 2174) establishes the national target of renewable energy usage. It states that by 2010 and 2020, totals of 10 percent and 15 percent respectively of PRC's energy is to be generated by renewable energy sources. In line with NDRC's policy, the NEA, SERC and the Ministry of Finance shall determine periodically the proportion of power to be generated by renewable energy sources as compared to the total electricity generation under the REL Amendments. Power grid companies are required to abide by these periodic targets and to enter into agreements to purchase the entire amount of electricity generated by renewable energy sources within the geographic coverage of their power grids.

Under such grid interconnection agreements, electricity generating enterprises must ensure that the renewable energy meets the technical standards for electricity dispatch and cooperate with power grid companies to maintain power grid safety. To further enhance power grid operations, the REL Amendments also require power grid enterprises to improve power transmission technologies and grid capacity to dispatch more power produced by renewable energy generators. Power grid companies are encouraged to adopt advanced technologies, such as smart grids and grid energy storage, to enhance power grid operation and management, which will in turn improve their capacity to absorb the power generated by renewable energy sources.

Renewable Energy Development Fund

In order to encourage grid interconnection, a Renewable Energy Development Fund ("RE Fund") will be set up under the REL Amendments. Administered by the Ministry of Finance, the RE Fund will source funding via surcharges on electricity generated from renewable sources and specific funds provided under the annual national fiscal budget. Under the REL, the difference between the costs incurred in interconnecting electricity generated from renewable sources to the grid and the costs normally incurred in interconnecting electricity generated from conventional sources is levied on the ultimate end-user. In comparison, the REL Amendments provide subsidies from the RE Fund to cover such shortfalls. To the extent that the sale of electricity is not sufficient to cover the interconnection fees and other relevant expenses, power grid companies may also apply for subsidies under the RE Fund.

To further encourage the consumption of renewable energy in the PRC, the RE Fund will also be used to support other projects that further renewable energy development as stated under the REL, such as scientific research, rural clean energy projects and independent power systems construction in remote areas and outlying islands. According to the NPC, a new set of administrative rules regulating the RE Fund is currently being drafted by the Ministry of Finance, the NEA and the Department of Pricing of NDRC and is expected to be issued soon.

The REL Amendments will provide a clearer legal framework and a more favourable environment for the actively expanding renewable energy sector in the PRC. It is expected that with the promising policies issued by the PRC Government and the further implementation of supplementary rules, the renewable energy industry will continue to develop and prosper.

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